From the report:

As more cities across the nation experience double dips in home prices, more than half (54 percent) of U.S. adults believe recovery in the housing market will not happen until 2014 or later, according to the survey released today. In a previous survey conducted six months ago, 42 percent of American adults said they thought the market would turn around by 2012 or had already turned around. Now, only 23 percent continue to think this will happen.

“Most Americans, as our latest survey revealed, overestimated how quickly the housing market would bounce back, but when it does, it will likely be a long and gradual process. Looking at the recent double dips in home prices, I expect the rest of 2011 to be volatile for real estate,” said Pete Flint, co-founder and CEO, Trulia. “On the flip side, mortgage rates won’t stay low forever and even if home prices continue to fall for a bit, now is still a good time to enter the housing market. In my eyes, we have another 18 months until we start to see signs of price stability in the housing market.”

“Our survey reflects a growing perception among potential homebuyers that the housing recovery is still a long way off,” said Rick Sharga, senior vice president of RealtyTrac. “Demand remains weak, loans are increasingly difficult to qualify for, and the shadow inventory of several million distressed properties is weighing down the market. All of these things need to improve before housing can recover.”

One quibble…

The semantics here are confusing. What, exactly, does “housing recovery” mean? Does it mean with home prices recover? – which many would directly define as returning to their previous levels. Or, does it mean that the recovery will begin – which is a nicer way of saying that this is when people think home prices will actually hit bottom and have nowhere to go but higher.

Given that some respondents replied that housing had “already recovered”, it is clear that these people answered the question in terms of a price bottom. Yet, I find it hard to believe that 54% of all respondents don’t think a price bottom will happen for three years or more. Many of these respondents are probably thinking in terms of prices returning to peak levels.

Point is, the trend is clear. Social attitudes are changing as home prices double-dip. But the actual statistics are pretty worthless.

Reader “Rick” who sent the link suggested “It looks like a scene from the movie Escape from New York”

Give the images time to load. They first load in black-and-white, then color. You can use the mouse to pan around but it is easiest to use the left and right arrows on the image.

Here is an image of the Michigan Central Train depot from the outside courtesy of the Wall Street Journal article Less Than a Full-Service City

I have written about Detroit on many occasions. Here are a few examples.

• Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City
• Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 Billion
• Detroit Heads For Bankruptcy; 50 Cities Must “Shrink to Survive”

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

A few interesting reminders:

• We really were on the verge of complete economic collapse
• Though he took a lot of criticism, Hank Paulson did an awesome job of holding things together.
• Most of the problems we had in 2008 still exist today – and if home prices continue their recent downward slide, we could be back here again.

Fannie Mae noted in a recent press release that “Nearly Twice as Many Underwater Borrowers Think It Is Okay to Default Due to Financial Distress.” Has strategic default reached a tipping point in America?

It’s these changes in latitudes, changes in attitudes
Nothing remains quite the same
With all of our running and all of our cunning
If we couldn’t laugh we would all go insane

Jimmy Buffett — Changes in Latitudes, Changes in Attitudes

Attitudes toward strategic default are changing. Last December I flatly stated, Strategic mortgage default will become common and accepted in 2011.

Many of those who chose not to strategically default make this choice because they believe making the payment is a moral obligation — an obligation above and beyond what is written in the contract. Banks are relying on those borrowers motivated by their perceived morality to keep making payments. Unfortunately, there is no longer a moral stigma associated with strategic default (accelerated default is a more accurate term).

Banks need a moral stigma to be associated with loan repayment. If the transaction were viewed by borrowers as a simple business transaction — which it is — then issues of morality are not effective at cajoling debtors into repayment, particularly when default is in the best interest of the debtor. Banks have long relied on borrower morality to get repaid.

Due to the events of the Great Housing Bubble, borrowers no longer feel a moral obligation to repay their mortgage debts. Borrowers view the system as corrupt. Many borrowers believe greedy lenders inflated prices with oversized loans to pad their own profit margins. Those borrowers are correct in their views and beliefs, and based on that view, many borrowers no longer feel compelled by morality to repay their mortgage debt.

Fannie Mae in it’s most recent press release confirmed my prediction. Strategic default is rapidly becoming accepted by Americans.

May 11, 2011

Fannie Mae’s National Housing Survey Shows Uptick in Consumer Attitudes Since December, But Rising Household Expenses May Be Cause for Concern

Though Perceptions of Investment Safety Have Been Declining, 57 Percent of Americans Believe That Homeownership Has a Lot of Potential as an Investment, Ranking Higher Than Other Investments

Feeling Less Financially Secure, Nearly Twice as Many Underwater Borrowers Think It Is Okay to Default Due to Financial Distress

One of my former co-workers is a deeply moral man. He views life rather simply, and most issues to him are either black or white. I watched him deal with the struggles of our declining incomes as the real estate bust dragged on, yet he remained committed to paying his mortgage on a house in Riverside County that declined about 50% in value. He was paying $3,200 per month for a property he could rent for $1,800.

Late in 2008, the pain became unbearable, and in a sudden change of heart, he moved out of his house to a rental in the same neighborhood and stopped paying his mortgage. In fact, he simply stopped everything. He left the house, stopped communicating with the bank, and moved on with his life. His was a purchase-money, non-recourse loan, so there wasn’t much the bank could do.

I never questioned him about his decision. It was none of my business. But knowing the kind of man he is, it must have pained him deeply. I know he was concerned about the standard of behavior he was setting for his children, and he was worried his family and his community would lose respect for him.

As it turned out, he was one of the last on his street to strategically default. All his neighbors he was worrying about had already bailed on their homes. He was the last holdout who fought acceptance of strategic default as an option. It cost him $20,000 more than it would have if he had made his move a year earlier when the situation was already hopeless.

WASHINGTON, DC — Fannie Mae’s latest national housing survey finds that Americans expressed more cautious optimism during the first quarter of 2011 than in the fourth quarter of 2010, but they continue to lack confidence in the overall strength of the housing market and economic recovery. The First-Quarter 2011 Fannie Mae National Housing Survey polled homeowners and renters between January 2011 and March 2011. Findings were compared to similar surveys conducted throughout 2010 and December 2003.

Survey results show that Americans’ newfound optimism about home prices, the economy, and personal finances is balanced by concerns about rising household expenses, which may require Americans to remain cautions about the recovery. Despite consumer caution, 57 percent of Americans still believe that buying a home has a lot of potential as an investment – ranking higher than other investments, such as buying stocks and putting money into and IRA or 401(k) plan.

Since March of 2009, real estate has been one of the poorest performing asset classes in the country. The stock market has more than doubled. Ben Bernanke’s printing press is causing commodities to rise, and most other asset classes have been going up as well. The real estate kool aid is more powerful than reality.

“Despite moderate signs of improvement in the housing market and the overall economy, consumer attitudes continue to be shaped by ongoing concerns about the recovery and their own financial situations,” said Doug Duncan, Vice President and Chief Economist of Fannie Mae. “Uncertainty regarding the improving labor market, expectations of little home price and interest rate movement, and rising household expenses has left consumers feeling less financially secure and translates into weak mortgage demand. While we have seen indications of improving economic activity in recent months, especially the strengthening of private sector employment, consumers’ attitudes improved only marginally, and in some areas not at all, from a year ago, reflecting the continued unevenness and uncertainty of this recovery.”

• Only 33 percent of Americans said they believe the economy is on the right track, up four percentage points from the fourth quarter of 2010, but virtually unchanged from January 2010 (31%).
• Forty-two percent of respondents said they expect their personal finances to improve over the next year (up by 2 percentage points from the fourth quarter of 2010), compared with 44 percent in January 2010.
• Forty percent say that their current monthly household expenses are significantly higher than twelve months ago, up from 34 percent in the previous quarter and 31 percent in January 2010.

Does anyone believe the government statistics on inflation? The cost of everything is going up — except real estate.

• While the number of Americans who perceive homeownership as a safe investment has been declining (from 83% in 2003 to 66% in first quarter of 2011), 57 percent still believe that buying a home has a lot of potential as an investment, more than any other investment tested.
• Nearly twice as many Underwater Borrowers (27%) think it is okay to walk away from a mortgage if they face financial distress than in January 2010.

They don’t devote much text to what is really the only important finding in their study. Of course, this particular fact doesn’t bode well for their massive underwater loan portfolio, so they probably aren’t going to make it a headline like I did.

Consumer attitudes don’t change that fast or that often. For twice as many borrowers to accept strategic default as acceptable behavior is an alarming trend for banks.

As is the case with any change in attitude, it takes a few pioneers to take a bold step forward. When the timid see the success of the bold, they emulate them. If their are significant rewards for the behavior — which there are for strategic default — then the behavior spreads rapidly, and all resistance to the idea is washed away.

Strategic default is part of the downward spiral that crushes house prices. The cycle above can only be broken if negative equity does not prompt strategic default. Since the debt relief is so substantial, the benefits quickly outweigh the negatives. Without a compunction against strategic default, the cycle continues unabated until house price graph looks like Las Vegas’s.

That is what strategic default does to a housing market. Lenders are rightfully frightened this outcome will repeat in every housing market in America.

The Fannie Mae First-Quarter 2011 National Housing Survey polled homeowners and renters to assess their attitudes toward owning and renting a home, confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system, and overall confidence in the economy.

The cognitive dissonance revealed in some of these survey results is truly remarkable. Read on.

Other Survey Highlights

Forty-four percent of homeowners believe that the value of their home today is worth 20 percent or more than what they originally paid for it, declining from 46 percent in June 2010 and 51 percent in January 2010.

One in three Americans (30%) expect home prices to strengthen over the next year, up four percentage points from the fourth quarter of 2010, but virtually unchanged from a year ago.

Most people live in a house seven years or less. Since every market in the county is trading below its 2004 price levels, it is highly unlikely that 44% of homeowners have homes worth 20% more than they paid for it.

Most people don’t have a clue about what makes house prices go up and down, so perhaps it isn’t too surprising that 30% believe house prices will go up. House prices in nearly every market will decline this year.

Fifty-nine percent of Generation Y Americans (ages 18-34) expect their personal financial situation to improve over the next year, compared to 49 percent among Generation X (ages 35-44) and 37 percent among Baby Boomers (ages 45-64).

Fewer African-Americans think the economy is on the right track (44% in the first quarter of 2011 versus 51% in the previous quarter), and they are less optimistic about their personal finances (61% expect their finances to get better over the next year compared to 67% in the fourth quarter of 2010).

Only 13 percent of Pre-Baby Boomers (age 65+) think it will be easier for the next generation to purchase a home than it was for them, compared with 28 percent of Generation Y Americans.

Does the generation that manages to price-out the subsequent generation feel guilty about their actions? If buyers really are priced out forever, how would homeowners feel about that?

Nearly one in four (23%) Mortgage Borrowers say they are underwater, compared with 30 percent in January 2010.

Only 31 percent of Underwater Borrowers think they have sufficient savings (compared to 42% in June 2010, and 43% of all Mortgage Borrowers).

Forty-six percent of Underwater Borrowers say they are stressed about their ability to make payments on their debt (versus 35% in June 2010, and 33% of all Mortgage Borrowers).

For more detailed findings from the survey, clickhere.

If nearly half of borrowers are feeling mortgage distress, strategic default will continue to grow in popularity.

Are principal reductions on their way? Some form of it might be. Who will get the free money coming?

But all are agreed as they join the stampede
You should never take more than you give

In the circle of life
It’s the wheel of fortune

Some of us fall by the wayside
And some of us soar to the stars
And some of us sail through our troubles
And some have to live with the scars

Elton John — The Circle of Life

A year ago today, I had Soylent Green is People author a guest post, The Debt Star has Cleared the Planet.

He’s back. And this time, the forces of light and goodness will prevail, right?

And now, Soylent Green Is People

(And my cartoons. None of the artwork in this post or any other is mine, and some of the cartoons are direct reproductions. My “cartooning” is limited to some limited photoshop work and the use of additional text generally in Comic Sans font.).

The Bankers Circle Of Life – principal reduction programs and unintended consequences. 

Soylent Green Is People — April 7, 2011

Banks have had it good for the past couple of years. They’ve feasted on taxpayer subsidized capital, allowed accounting tricks to book phantom profits, and transferred privately created risk to the public’s balance sheet with nary a whisper of protest. Many responsible home owners continue to enriched said same bankers by paying mortgages that can never be refinanced into today’s lower rates. By owing more than the present value of their property, many home owners are trapped in a cycle that often ends in financial ruin.

The final insult to those who chose to live up to their promise to repay instead of living large through leverage will soon be here. How do I know this to be true? Since Irvine lives in the shadow of the House of Mouse, I thought it best to re-tell a family favorite to help illustrate how we got here, and what our inescapable future might look like.

In 2003 homeowners from far and wide came to see what special thing NAr-Fiki was revealing to the people of the USALands. Holding for all to see as an example of our bright future was Home Ownership, the offspring of King Conforming.

As Home Ownership grew older, King Conforming took him up to the highest point of the land – Peak Equity – and showed him a bountiful future. “Someday you’ll be a part of the Circle of Life. You’ll buy a home, pay off the loan, have plenty of equity to share with your children, and eventually see them become a home owner just like you.” That’s how it’s supposed to work out.

Unfortunately things began to go the wrong way in the USALands. Bankers ran out of loan programs that allowed greater fools to purchase homes at ever inflated prices. People began to panic. A mad rush to the exit began.

Home prices fell, crushing King Conforming. The only Big Cat left alive after the stampede was Home Ownership’s mean old Uncle “Sam” and the banker cartel.

During the Great Recession, Uncle Sam and his minions pushed Home Ownership out of the USALands. Jobs were few and far between. Prices were tunneling their way to the center of the earth. Only a few places seemed hospitable to relocate to. Eventually Home Ownership found the OC Oasis, a land flowing with milk an honey. There he made a few friends – the chatty Rodent and a well fed Pig. Home Ownership marveled at the lifestyles Rodent and Pig had – swimming pools with waterfalls, eating out more than in every night. How could they pay for their life of luxury? “Home Equity Ponzia” said Rodent. “It’s a wonderful thing”. Home Equity Ponzia, ain’t no crying shame”. “It means “No Worries” exclaimed Pig. Home Ownership was a little unsure of what all this meant and so didn’t dive in to debt along with his new neighbors.

As time went on life in the OC Oasis wasn’t going as planned. He wasn’t fully employed, things were getting a bit tight financially. In a vision one night King Conforming appeared telling Home Ownership that since he paid his house loan on time, certainly there were programs available that might make things easier, but they could only be obtained by going back to the land that Uncle Sam ruled. Even old NAr-Fiki came by, reminding Home Ownership that strategic default was a shameful, bad thing.

In the USALands, things were now worse than ever. Uncle Sam tried every trick in the book to get home prices back on track, but nothing was working. The remaining residents faced either unfit loan modifications or a lifetime of serfdom.

Home Ownership asked Uncle Sam to force his minions to let up on his loan terms, but to no avail. “Change?” asked Uncle Sam… “What is this hopey change you speak of? My banker cartel can’t profit from changing your loan terms so why would we do it?” Home Owner tried down to the last ounce of his strength and legal capacity to wrest control of his financial future from the bankers clutches but alas, it wasn’t to be.

Home Ownership was surprised to see his friends Rodent and Pig sitting next to Uncle Sam. ” Whatever remains after my bankers are done with you”, sneered Uncle Sam, “will be given to these two”. “Hey”, Rodent and Pig sang in unison, “We’ve got to maintain our lifestyle somehow. HomeEquity Ponzia!” Uncle Sam’s last words to the cornered Home Owner were chilling – “That’s how the Circle of Life really is, baby!”

And so the bankers devoured Home Ownership. The End.

Hey, I didn’t say the story would had a happy ending. This isn’t some friggin’ fairy tale.

Principal reduction plans are coming to USALands. Uncle Sam and his banker minions have several programs in place to get this started.

Bank of America set to write down principal on California mortgages

Mortgage Principal Reduction in Play

Ally to reduce mortgage principal in Michigan

We’ll focus in this post on what may become the biggest, baddest one of all, but first:

The Why Question.

Why are bankers going to reduce principal? What benefit might there be for them? The answer to this question is fundamental in understanding the reason for these programs. Like any complex story, it’s best told when the details are simplified. The following is a close approximation of why PA loans will start in earnest, but not a scenario that fits all circumstances. Also, we’re going to use a few assumed names along the way for copyright avoidance illustration purposes.

In 2008 Bank of Albania (BA) was given incentives by the Government to absorb the assets of the troubled mortgage lender Capital Wagon (CW), one of many marriages of convenience during those days. Venture capitalists also began to purchase from the FDIC mortgage debt from other failed banks over the past few years. The companies essentially paid a net price of .20 cents on the dollar or less for these troubled mortgage assets. Some assets turned in to REO’s, some loans were modified to keep the regulators and Congress at bay, but a vast number of these loans are simply not performing, threatening to swamp the survivor institutions balance sheets.

HUD created several programs to help facilitate mortgage relief for income distressed home owners, but it is the FHA Short Refinance / Negative Equity program that will be used to cycle the remaining private non-performing loans into taxpayer guaranteed debt.

Aren’t they all bad banks?

Banks like BA will create a “bad bank” (BBA) – a place todump off load their CW legacy assets at perhaps .40 cents on the dollar. That’s a nice profitable return (since their cost basis was .20 COTD) that BA conceivably could use to declare itself a “Well Capitalized” bank again.

BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’

Barclays could set up a “bad bank”, say analysts

How to Build a Bad Bank—for the Greater Good

BBA will now contact the home owners and offer them an FHA Short Pay refinance. Imagine a home owner getting a call from their loan servicer that goes something like this:

BBA – Hi, is this Mr. Refi Rodent?

RR – Yes it is.

BBA – I see you owe us $500,000 on a Stated Income 5/1 ARM.

RR – You mean the loan I’ve not made the $2,700 payment on for the last two years, The one with a rate of 3.2%?

BBA – Certainly! Here’s what I’d like to offer you. We see that home values in your area are now at $350,000. What if we cut your principal balance by $175,000 down to $325,000 and give you a 6.0% 30 year fixed loan. The payment would be $2,260. You owe less, your payment is reduced by $440, and all we ask is that you re-start to pay your loan for the next 60 days while we process this principal reduction. Deal?

RR – Frak YAH!

So in a few quick months BBA has turned a non-performing, un-sellable $500,000 loan (that cost them $200,000 when “purchased” from BA) into a shiny new easily re-sellable recourse FHA loan at $325,000 which you and I now are on the hook for as a taxpayer. My guess then is that BBA will in turn sell the loan back to BA at .80 cents on the dollar ($260,000) which makes the “Bad Bank” look like a pretty savvy operator. BA now has a 6.0% rate loan on their books which cost them originally around $100,000. The Bankers Circle of Life!

Remember this important factoid: The banks paid the market value of these loans or $100,000. The borrower is paying on the contractual value, or $500,000. When an FHA Short Pay refinance is transacted, the home owner is not getting a reduction in principal equal to the value of the loan, according to the bank’s valuation of the asset. The home owner is actually increasing the amount of their debt from the $100,000 assumed value to $325,000 present value based on current home prices. What happens tomorrow if the value of homes drops by another 20%? That’s the FHA Short Refinance borrowers Circle of Life. Their best course may be to again stop paying their loan. Rescue came to them once before. Whose to say it won’t happen again?

Some loan service companies offering these negative equity refinances will add a 5 year clawback provision. If there is a principal reduction of $100,000 and you sell at a higher price than current value, the home owner will have to give up the gain. After 5 years pass the feature sunsets. I’d be happy to wait 60 months before pulling the rip cord and bailing out if it meant I could sell for a gain, wouldn’t you?

Additional issues.

The borrowers who will have these offers made to them are those who took out Alternative Financing (ALT-A) or other now toxic portfolio loans, not traditional FNMA Agency 30 fixed rates. The Government created the Home Affordable Refinance Program (HARP) for those mortgages. These loans simply had the rate and not the principal balances reduced. Loan to Values under HARP were capped at 125% which does not help you if you purchased in parts of the Inland Empire or pretty much anywhere in Kern County. You’re stuck with the loan balance and the rate from 2006 unless you strategically default. Thanks for playing.

As principal reductions begin to spread, the social consequences will be catastrophic. When your neighbor comes over to share their excitement about their BA loan balance reduced by 35%, what will BA’s response be when you phone to get the same deal? That call will go something like this: 

Responsible Home Owner: Hi, I’ve got a $417,000 30 year fixed loan that I didn’t refinance. My rate is 6.0% but values are such that I cannot fit within the HARP guidelines. The neighbor across the street just refinanced with you and got a lower balance. I’d like to do the same thing.

BA – I see that your loan is owned by Fannie Mae. Take it up with them.

Responsible Home Owner – But you made the loan, you take the payments, and you just refinanced someone I can see from my living room window lounging in his back yard pool. What’s the deal?

BA – I’m sorry, We actually bought this loan from another bank that wasn’t us even though we did have the loan originally. Besides only special cases can use this program. Would you like to open a new CD account with us? Our new rates are .00011013 percent for 60 month!

Responsible Home Owner – FFFFFRRRAAAACKKK YOOOOOOO!

Why should Responsible Home Owner continue to make their house payment at that point? Is it made out of guilt, obligation, or shame? To be honest, I’d have real doubts why I should fork over good money after bad if my neighbors got a consequence free haircut on their loan balance.

What now happens to property values? Well for one lets say values remain flat. The FHA Short Pay home owner decide to put their home on the market at the same time you do. Their sale will be an “Equity Sale” at a market price. Yours will be a Short Sale that might not close. If values fall further, their home will might also be a Short Sale, perhaps even an assumed FHA loan. Yours will likely become an REO. If values increase, you might eek out a slight profit and rent from there on out. Their gain will go towards the purchase of a better home in a nicer neighborhood.

In a world where principal forgiveness, unevenly and inequitably applied, becomes normative, the responsible will end up as waste byproduct in the Bankers Circle of Life. You can’t fight the coming principal reduction wave. It’s reach will stretch not just through the financial world, but down to the very streets we live on. It’s simply the amplified end point of a national policy of that enforces zero consequences for any actions.

Hakuna Matata er… HomeEquity Ponzia to all.

Soylent Green Is People.

It’s the Circle of Life

And it moves us all
Through despair and hope
Through faith and love
Till we find our place
On the path unwinding
In the Circle
The Circle of Life

The Lion King — The Circle of Life

Mall vacancies hit their highest level in at least 11 years in the first quarter, new figures from real-estate research company Reis Inc. showed. In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.

The outlook is especially bad for strip malls and other neighborhood shopping centers. Their vacancy rate is expected to top 11.1% later this year, up from 10.9%, Reis predicts. That would be the highest level since 1990.

In the Denver suburb of Westminster, Colo., city officials are negotiating to buy and raze the 34-year-old Westminster Mall and redevelop it into offices, homes and stores. The 1.2-million-square-foot mall, once home to a Macy’s, Trail Dust Steak House and Mervyn’s, has seen its sales-tax generation plummet in recent years, to $1.5 million last year from $8.5 million in 2000, city officials say.

The mall went “from a place that was once vibrant to something that is now virtually vacant.”

Shopping Center Economic Model

In 2005, the mall-vacancy rate hit a low of 5.1%. For strip centers the boom-time low vacancy rate was 6.7% that same year.

On April 18, 2008 I wrote Shopping Center Economic Model Is History

Lease rates are going to sink, vacancies are going to soar, and the oncoming supply of mall space with no tenants is going to bankrupt many regional banks that funded such construction. The shopping center economic model will soon be history.

Bank Failures

Inquiring minds may be interested in a recap of Bank failures in the United States 2008–2011

2008: 25
2009: 140
2010: 157
2011: 26

Only So Many Shoppers

A couple weeks ago I was contacted by a reporter in Las Vegas about a new mall going up in the city. I told him the obvious: There are only so many shoppers.

What good can a new mall do? During construction it will provide a few jobs. Then what? Then instead of shopping at the old mall people start shopping at the new mall. No one buys any more stuff.

Shopping Center Dynamics

Ironically, is quite common for city councils to give huge tax breaks to new businesses that “create jobs”.

Mayors love ribbon-cutting events like mall openings. Then a few years down the road if not sooner, everyone wonders where the jobs are and why expected sales tax revenues did not materialize.

There is no need to wonder. The answer should be easy to spot in all the vacant strip-malls and closed stores elsewhere.

To be sure, there are some city revivals, but those come at the expense of shoppers staying local rather than driving to the nearest town . The reverse also happens. People travel to the new mall in the neighboring city rather than shop local.

This dynamic ensures that malls and strip-malls go up everywhere until there is a crash, which is precisely where we are now.

Online Sales Compound the Mall Problem

A few years back online sales were about 6% of total sales. Online sales hit 12% this past Christmas. State and local governments are more than a bit upset about the lost sales tax revenue.

Malls and big box retailers are upset too. Everyone hates Amazon, except Amazon customers.

Big box retailers have a glut of space and many are starting to shrink the number of items they carry. However, every item they do not carry that someone wants to buy, is another item someone will decide to buy online.

Yet, every online purchase is one less trip and fewer miles on the car. Thus online shopping also impacts gasoline sales, gasoline tax collection, and car maintenance.

Demographics

The population is getting older. In advanced years, much of what people buy is health- or food-related, not gadget-related or travel-related.

A certain set of people never became comfortable with the internet and internet shopping. Younger generations have no aversion to buying online or not buying at all.

Those fresh out of college are deep in debt and struggle to pay that debt off.

As boomers head into retirement many are scared half to death about insufficient savings. Their peak shopping years are now well behind them.

One bright spot lately has been a revival in luxury items. However, that has largely been a result of the stock market revival. Should there be a sustained relapse in the stock market, luxury sales will take another dive as well.

In light of the above, I see no sustainable revival in the shopping center economic model for years to come.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

There are now 1.8 million more people employed than at the depths of this Greater Depression. The working age population has grown by 3.2 million people since 2009. Inexplicably, the civilian workforce has actually declined by 736,000 over this same time frame. The government drones at the BLS want us to believe these people voluntarily left the workforce. Obama apologists declare this is because Baby Boomers are leaving the workforce as they retire into the sunset. That is laughable, as all studies show Boomers have not saved enough to retire and will be forced to work into their 70′s.

The manipulation of data in order to spin the economic situation in this country in the best light possible has become so blatant that only the most ignorant could possibly believe it. The corporate mainstream media dutifully reports the propaganda, without ever critically assessing what is being distributed by the government. The percentage of the American working population in the workforce consistently ranged between 66% and 67% from 1998 through 2008. Then, suddenly in 2008, after the economy went in the tank, a couple million Americans found better things to do with their spare time and left the workforce. Anyone with an ounce of brains knows these people gave up and are really unemployed. The percentage of people in the labor force should be 66.5%. Using this 20 year average would add 5.5 million people to the civilian labor force and the unemployment rolls. This exercise in reality gives a real unemployment rate of 12%.

It is interesting that Obama and his top economic propagandist Austin Goolsbee were out in full force on Friday, taking credit for the “tremendous” job gains, but had nothing to say earlier in the week with a much more revealing government report. There is now an all-time high of 44.2 million Americans and 20.7 million households in the food stamp program. This is 14.3% of the American population and 18% of all the households.

I’d like to hear the Administration spin for the SNAP program. Since the supposed end of this economic recession in late 2009, the number of people added to the food stamp rolls has increased by 8 million. The annual cost for this program will reach $70 billion this year, up from $33 billion in 2007. If the economy is recovering and people are voluntarily leaving the workforce, why have the number of people on food stamps increased by 22% since the official start of the recovery? Why does the number of people going on food stamps go up every month? The answer is that there has been no economic recovery for the average American. Wall Street bankers and the ultra-wealthy elite are the only people who have experienced a recovery.

The true picture of the American economy is that in 2007 there were 146 million Americans employed, or 63% of the working age population. Today, there are 139.9 million Americans employed, or 58.5% of the working age population. Over this time frame, an additional 7.1 million Americans entered the working age population. In 2007 there were 26.3 million Americans on food stamps, or 8.6% of the US population. Today there are 44.2 million Americans on food stamps, or 14.3% of the US population. To call the current economic disaster a recovery is to practice the art of the Big Lie.

Real Median Household Income, which is calculated using the dodgy government CPI, has not grown in 14 years. Using a true, non-manipulated inflation figure and real median household income is no higher than it was in 1987. The mainstream media reports the headline figures like the good lapdogs they are. The BLS Establishment data going back to 1965 is a treasure trove of interesting data. The average hourly wages have declined for the last three months and are essentially flat in the last year.

Decades of Decay

The current state of disarray in the job market did not occur overnight. It took decades of bad choices, willful ignorance and delusion. By charting BLS data over the last five decades, a picture of an empire in decay appears before your very eyes. We aren’t the first empire to experience this decay and won’t be the last. It is only in retrospect that it becomes clear that all empires gravitate from producing and creating to finance, debt and lending. The hubris of great empires leads them to believe they have been chosen by God as a special nation destined for eternal wealth and success. The seventeenth century Spanish empire thought so. The Dutch and their glorious maritime empire thought so. The all-powerful British Empire thought so. Do you hear much about these empires anymore? They all sacrificed productive activities and embraced the glories of a debt based society. Kevin Phillips details these declines in his brilliant book American Theocracy :

“Understandable as this cockiness might be, history teaches a crucial distinction: nations could marshal the necessary debt-defying high wire walks and comebacks during their youth and early middle age, when their industries, exports, capitalizations, and animal spirits were vital and expansive, but they became less resilient in later years. During these periods, as their societies polarized and their arteries clogged with rentier and debt buildups, wars and financial crises stopped being manageable. Of course, clarity about this develops only in retrospect. However, even though war related debt seems to have been part of each fatal endgame, the past leading world economic powers seem to have made another error en route. They did not pay enough attention to establishing or maintaining a vital manufacturing sector, thereby keeping a better international balance and a broader internal income distribution than financialization allowed.”

The chart below paints a clear picture of decay, debt and delusion. In 1961 the population of the United States was 184 million. There were 54 million employed Americans, with 15 million of them manufacturing goods for America and the rest of the world. Today the population of the United States is 310 million. There are 11.7 million people manufacturing goods, mostly weapons for export to our favorite despots. The population has grown by 68%, while manufacturing jobs have declined by 22%. Consumer spending accounted for 62.8% of GDP in 1961. Investments totaled 14.3% of GDP and we ran a trade surplus of $4.9 billion. Today, consumer spending accounts for 71.1% of GDP. Investments total 12.5% of GDP and we are running a $500 billion trade deficit. Over the course of 50 years, we’ve devolved from a production and exporting society into a consuming and borrowing society.

A perusal of the chart shows the dramatic downturn has really occurred since 1980. Goods producing jobs have declined by 6.3 million in the last 30 years, while service jobs have grown by 46.5 million. Who would want to get their hands dirty on an assembly line when they could shuffle papers, invent CDOs, MBOs, and CDSs, create financial models to destroy the world, bribe rating agencies, file frivolous lawsuits, teach Keynesianism, or use the 60,000 page IRS code to help GE pay no taxes on their $14 billion of income. Alan Greenspan and many other “thought leaders” declared that America could succeed through its ingenuity and creative thought process. The rest of the world could handle the messy business of building things. So goes the hubris of an empire that has peaked. To get a clearer view of the conversion from a productive society to a consumption society, converting the above chart to a percentage basis is useful.

In 1961 America was a well balanced economic powerhouse. Goods production accounted for 34.5% of all jobs, with manufacturing making up 27.7% of all jobs. Goods production now accounts for a pitiful 13.7% of all jobs in the country. The slack was picked up by financial analysts, accountants, lawyers, tax specialists, and bankers. They surged from supporting roles in a production society with 11.7% of the jobs in 1961 to the dominant big dogs today, with 18.9% of the jobs. The rest of the slack was taken up by teachers, school administrators, nurses, cabana boys and waitresses as they surged from 12% in 1961 to 25.3% of all jobs today. There is one problem with this shift. We have millions more educators, but our school systems churn out millions of functionally illiterate non-critical thinking drones. We have millions more healthcare professionals and are the most obese, unhealthy nation on earth even though we spend more per person than any other country. A country that employs one quarter of their workers in jobs that do not increase the wealth of the country is a country in decline. This shift has also pushed people into lower paying jobs.

The insidious effects of Federal Reserve generated inflation can be seen in the above chart. The BLS Establishment data going back to 1965 reveals much about the hidden impact of inflation over time. In 1965 the average hourly wage was $2.65. Back then, Americans put in a full work week, averaging 38.6 hours per week. The average American was making $101.52 per week. This was enough for a family to live comfortably on with only one spouse working. Fast forward to today and we have an average wage of $19.30 per hour and work week of 33.4 hours. This yields an average weekly pay of $644.62. It is also necessary for most households to have two working spouses to make ends meet. I added the government reported CPI at the bottom of the chart to provide some perspective on our 50 years of middle class wage compression. Applying the change in CPI since 1965 to the change in average weekly earnings provides the clearest view of what has been done to our country by the Federal Reserve and the government/corporate oligarchy. It would have taken weekly wages of $713.25 to have kept up with inflation since 1965. The average worker today is making 10% less than they did in 1965, on an inflation adjusted basis.

Wages in the service industries fell behind by even more, with the exception of bankers, doctors and teachers. The finance sector wages and the healthcare/education sector wages are 25% higher than their inflation adjusted wages in 1965. You reap what you sow. The country has decided that bankers, doctors, and teachers are relatively more important to our economy than people who make products, create wealth, and increase the productive capacity of the country. Any impartial outcome based assessment of these choices would conclude these choices have been an unmitigated failure.

The financial/ banking sector has peddled debt to the masses that didn’t realize their standard of living has been declining for 50 years, and blew up the worldwide financial system through their greed and fraudulent business practices. We spend more per child on education than any country in the world and test scores are lower than they were 40 years ago. Our children graduate high school with no critical thinking skills and the inability to decipher propaganda from truth. We spend more per person on healthcare than any other country, but obesity, diabetes, and heart disease are rampant. Administrative bureaucracy and vast amounts of rules and regulations consume billions in these sectors of our economy. The simple art of creating and producing things that other people need or want has been cast aside by a country who thought they could borrow and spend their way to long-term prosperity.

So, here we find ourselves 18 months into a “recovery” and the country has added 1.3 million jobs in the last year. We’ve added 529,000 lawyers, accountants, consultants and tax specialists. We’ve added 420,000 teachers, nurses and administrators. We’ve added 193,000 waitresses and hotel busboys. And we’ve added 238,000 Wal-Mart clerks. Our well balanced economy is back in gear. What could go wrong?

The truth is that the country remains in a 50 year death spiral of bad choices, delusion and fraud, created to benefit the few at the expense of the many. The average American wallows in a reality of low wages and high debt. Some of this reality has been self inflicted. Willful ignorance is a choice. Educating yourself to the truth is available to every American. Spending less than you make is something everyone can do. But, at the end of the day, the 1% at the top of the food chain controls the levers in this country. While the average American has fallen behind over the last 50 years, the ultra-wealthy elite have prospered.   The top 1% takes home 25% of the national income and control 40% of the financial wealth in the country. Their lives have improved considerably. Twenty-five years ago, the ruling elite “earned” 12% of the national income and controlled 33% of the financial wealth. These are the people who control the message. They own the mainstream media. They run the Wall Street banks. They control the Federal Reserve. They write the laws and the tax code. They control the politicians like puppets on a string. An economic system based upon debt and Federal Reserve generated inflation benefits these chosen few, while destroying the middle class of America. We’ve chosen this path and are destined to experience the same fate as Spain, the Dutch, and Britain.

As the housing market crumbles, those most responsible for its demise are the ones suffering the least.

Caviar and cigarettes
Well versed in etiquette
Extraordinarily nice

Recommended at the price
Insatiable an appetite
Wanna try?

Queen — Killer Queen

The banksters taking over our country enjoy extraordinarily nice lives of caviar and cigarettes. They’re insatiable greed is only surpassed by their lack of accountability. In last weeks post on shadow inventory, I came across a February story on how bankers let each other squat. It really made me angry:

Bankers allow each other to squat

One of the most infuriating facts about shadow inventory is its epicenter: the New York MSA. Boneheads in New York think their market is immune as it is one of the few where properties still routinely trade at peak prices. Little do they know that this price stability is an illusion created by shadow inventory.

Shadow inventory to push foreclosures to new heights

by JACOB GAFFNEY — Wednesday, February 2nd, 2011, 3:57 pm

“The shadow inventory in the New York MSA will take the longest to clear — 130 months as of fourth-quarter 2010. That is at least twice as long as it will take in any of the other top 20 MSAs and 2.7 times the average time to clear for the U.S. as a whole,” the S&P report states. “This is primarily due to very low liquidation rates in New York.”

What the hell is this? Very low liquidation rates? Why is that? Could it be that bankers don’t want to hurt their own property values? What other reason could there be? Assholes.

The behavior of the banksters has been utterly reprehensible. They unleash a destructive Ponzi virus on our financial system for their own personal enrichment. When their Ponzi virus consumes the housing equity of a generation, they (1) give themselves huge bonuses, they (2) lobby government for handouts, and they (3) selectively refuse to foreclose on properties in their neighborhoods to preserve their own property values.

These creatures have taken greed and unaccountability to new hubristic heights.

A Lawyer’s Perspective on… Promoting and Preserving Failure in America

Friday, March 18, 2011 — Capitalism Without Failure 

It was with considerable sadness that I learned, during the financial crisis, that people I knew – economists, investment professionals, bankers – had given bad advice to their companies and their clients. They had not seen a housing bubble developing. They had not seen a highly over-leveraged banking system. They had not questioned the viability of an opaque derivatives industry that was growing exponentially. In fact, they had not seen any abnormal risk. And they had advised their clients and firms accordingly. As a result, their funds and their portfolios and their clients lost massive amounts of money.

I was concerned for these people. After all, their inability to call a major economic catastrophe, with plenty of warning signs, had led to horrible losses. And since plenty of people had been predicting a collapse… I assumed that my friends would all be losing their jobs, and their reputations.

That is a very reasonable assumption. Bankers should be held accountable for the problems they created. Those responsible should have lost jobs, and some of the worst should have gone to prison.

I could not have been more wrong. That’s not how it works in the world of elite finance and economics. In the highest echelons of economics and banking and investing and advising, the people that succeed are not the ones that get it right. The people that succeed are the ones that do what they have to do in order to succeed.

Fifteen years ago, I completed a Masters Degree in International Economics at theJohns Hopkins School of International Studies. I had studied with a number of people that ended up working at top banks. In 2005, I had been considering a home purchase but was becoming convinced that real estate in the USA was in an unsustainable bubble. At that point, I had been working as an attorney for a number of years – so I thought I should speak to an expert. I called an economist friend of mine that had ended up at Goldman Sachs and asked him about the possibility that there was a bubble that could be bursting. He assured me that the economy was strong, and robust, and that I had nothing to worry about. He told me that economists who were worrying about potential weakness ahead, had it dead wrong and that they should be ignored. He called them “crazy”.

If I had listened to him, I would have bought a house at the height of the market – and would have lost every penny of down payment that I had managed to scrape together. Luckily, I did not listen. Instead, I considered what he said. Then I read more about what was going on and decided to take a huge risk – I decided to ignore the experts, to not to buy a home, and to risk missing out on the huge appreciation that those experts were predicting. In the end, he turned out to be wrong – not jut a little bit wrong, but absolutely and completely incorrect.

How many realtors and mortgage brokers told their clients tales that turned out to be a fantasy? And how many of those buyers made their decision based on the faulty advice? Do the realtors involved feel guilt or shame over their responsibility for the family financial catastrophes that resulted from their bad advice?

I didn’t see him until after the meltdown was well behind us. I assumed he had lost his job. After all, his analysis was an absolute disaster. And he had been more than willing to share it.

Here’s where my own powers of analysis failed in a major way: I assumed that he would have lost his job; instead, he had been promoted. In fact, not one person I knew in the financial industry had lost their job. I remember subsequently chatting with another Goldman Sachs economist shortly after the bailouts. He seemed completely unaware that there was even an issue with regard to how the industry had been protected. All that was really going on for him was that he had multiple nannies helping to care for his 2 young children. He was otherwise in terrific spirits.

My very fortunate friends turned out to be a perfect microcosm of what we all witnessed: the worst analysts with the worst judgment that got us into the worst financial quagmire in a century, were not only maintained – they were promoted. This happened in the private sector, academia, and in the public sector. In the public sphere, Tim Geithner and Ben Bernanke come to mind. And let’s not forget Robert Rubin and Larry Summers. (And I would sincerely appreciate it if we could stop hearing from Alan Greenspan – arguably the arch-architect of our misery.)

We have done little to fix the underlying problems. We have now entrenched incompetence and largess into our system of finance at the expense of good governance.

We all know why my friends ended up on top; we bailed out their failed banks and our compromised financial system. That is wrong on many levels. But it’s not as wrong as what has happened within our government. If our political economy had been functioning properly, Geithner and Bernanke would have lost their jobs – and their influence – long ago. Instead, Bernanke is arguably the most powerful individual in the world. And Tim Geithner (an alum of mine from SAIS!) is not far behind.

The United States has an incredibly resilient economy. It has withstood mismanagement and corruption on a scale that rivals almost any country in this world. It continues to putt along, notwithstanding the undermining of meritocracy, fairness, and justice – in every sphere. Unfortunately, the long-term prospects for a system that promotes the most corrupt and most compromised actors is poor.

Even the most resilient economy on earth requires the rejuvenation that comes with the removal of people with failed ideas, poor judgment, and who are corrupt. Our current leadership has taken a stand when it comes to our economy: instead of weeding out the corruption and allowing for organic economic strength to return, they are working to overwhelm the corruption-induced-failure with the economic equivalent of steroids. That can only work temporarily when the worst and most corrupt actors are allowed to thrive and maintain leadership roles. Ultimately, those compromised people and their compromised ideas will threaten our macro-economy again. We will never need principled and courageous leadership more than when that eventuality is upon us.

How do we purge the system?

Our financial services sector is too large. Contrary to popular belief on Wall Street, pushing paper does not create value. Wall Street is supposed to determine which sectors of our economy and which businesses obtain capital to expand. They are traffic cops directing the flow of money. Their activities create nothing of value directly, but they enable those who create valuable goods and services.

Unfortunately, we have let this sector of the economy take over. They believe their fiefdom will endure forever. Beyond the desire to save their own housing values in NYC, bankers believe someone will come along who makes enough to pay a huge mortgage. They plan on holding onto all their shadow inventory as long as they have to for buyers to come back. They don’t think it will take very long. If we don’t stop them, they may be right.

Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%).Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s.

So though U.S. housing continues losing value–U.S. home prices declined in January,continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes–property tax revenues continue their inexorable rise.

I’ve plotted out the total national property tax revenues on a chart of the Case-Shiller home-price index.

According to the Bureau of Labor Statistics inflation measures, if property taxes had risen along with inflation, the total property tax revenues nationally would have risen from $210 billion in 1996–more or less about the start of housing’s decade-long bubble–to $296 billion in 2011.

But property taxes totaled $476 billion in 2009, a solid 60% ($180 billion) above inflation

So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times. Here is a chart of California’s systemic gap between revenues and expenditures. Please note that the apparent alignment of revenues and expenditures in 2010-11 is entirely illusory: the budget gap is $26 billion or perhaps more, once the fantasy accounting is removed.

And here is a chart of house prices in a classic symmetrical post-bubble deflation. I’ve drawn a target which is drawn from the reversion-to-the-mean model that the majority of bubbles track: prices don’t just retrace to the starting lift-off point, they overshoot to a level below that initial line.

As I reported in House Values Fall 30%, But Property Taxes Keep Rising (December 22, 2010), the nation’s state and local governments will collect an estimated $476 billion in property taxes in 2010–about 90% of state income tax revenues of $250 billion and sales tax revenues of $286 billion combined.

A decade ago, property taxes were roughly equivalent to sales taxes. In 2000, property taxes totaled $247 billion and sales taxes came in at $223 billion– a differential of roughly 10%. Sales taxes have increased by 28% since 2000– roughly in line with the rise in consumer prices.

State income taxes have risen nationally from $217 billion in 2000 to $250 billion in 2010, after peaking at $303 billion in 2008, just as the global financial meltdown began. That’s a rise of $33 billion, or 15%–actually less than inflation (27% from 2000 to 2010).

Add all this up and we can see that local governments have become far more dependent on property tax revenues than they were in 2000. Thanks to stiff increases in junk fees and taxes of all kinds, state and local government revenue has climbed back to its pre-recession height of $1.29 trillion, roughly equal to the $1.32 trillion collected in 2008. In terms of total tax revenue, the recession is over–yet the gap between expenditures and revenues continues to widen in most states and local governments.

As their properties continue sliding in value, devastating their net worth, do you reckon the average homeowner might start resenting the rapid rise of the taxes they pay for the privilege of owning real estate?

Imagine if your income taxes rose by 27% even as your income declined by 30%.

The ultimate tax hostage is the property owner. The business owner can pull up stakes and leave, the wage earner can transfer or get another job elsewhere, and the consumer can restrict his/her consumption to lower the burden of sales taxes, but the property owner is the perfect tax donkey because the transaction costs of selling are so prohibitive.

With some 11 million homeowners owing more on their mortgage than their house is worth, i.e. they are underwater, then selling is no longer an option unless the bank accepts a short-sale–something the lenders are loathe to do.

Given that there’s about 48 million mortgaged homes now, then those 11 million represent about 23% of all homeowners.

How long will property owners keep swallowing significantly higher property taxes even as the value of their real estate continues declining? It’s an open question. I suspect the answer won’t be known until some invisible breaking point is reached, and voters simply rebel against higher taxes while their own net worth and incomes stagnate.

Just because there is little visible resistance to sharply higher property taxes (and other taxes and junk fees as well, of course) doesn’t mean resistance isn’t building below the surface, unreported by a financial media obsessed with the S&P 500 as the only metric of wealth and prosperity and unnoticed by state and local governments obsessed with stripmining more tax revenues by any means at hand.

The tax donkey is already weighed down with a heavy load, and it won’t take much more than a double-dip recession, higher prices for essentials and declining home values to snap the pack animal’s weakened back.

The rising S&P 500 looks good as propaganda, but for most Americans, that’s about as edible and nourishing as an iPad.

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